Survey explores how electrical distributors impact contractor profitability
It's 7 a.m. at the job site, the distributor promised your delivery yesterday, and he's still not here. At 10 a.m., the truck shows up, but with only 76 of the needed 250 feet of special wire you ordered. You call the distributor and raise hell. At 2:30 p.m., a special “rush delivery” truck arrives, again with only 76 feet of wire. With little patience left, you call the distributor back, demanding an explanation. As you're talking, you quickly realize the problem: The delivered wire was listed correctly on the packing slip as 76 meters, which is 250 feet; however, someone filling the order at the distributor failed to make the conversion. Although you understand how the mistake was made, at this point you have very little patience left for such a silly error — especially one that was made twice in one day!
Every day, distributors promise to provide services such as this that will improve a contractor's productivity, including product delivery, product locating, or bar coding. However, many distributors miss the mark by not recognizing the value electrical contractors are looking for from them. You seek value in the field to improve productivity. Unfortunately, many distributors look at value from a sheer sales perspective.
Electrical distributors provide the essential connection between manufacturers, owners, and your company. A distributor provides a service to the manufacturers (i.e., arranges and facilitates the transfer of materials from the factory to the contractor). A supplier, on the other hand, provides services to the owners and you, responding to both of your needs. To see how distributors' actions affect contractor profitability, let's take a look at some recent market research.
In a survey conducted by MCA, Flint, Mich., using interview and Web-based survey methods of 1,500 electrical contractors and 50 distributors, several distributors were asked about their perception of the value they provide to electrical contractors. The respondents, which included representatives from sales, operations, and service, were asked to rank each service from 1 to 10, with 1 being the least valuable and 10 being the most valuable to the customer. Figure 1 (click here to see Fig. 1) shows the top 10 services respondents perceived as having the most value for the contractor. (The services are listed in order, based on the average perceived value from all survey respondents.)
Interestingly, most of the services that the distributor perceives as having the highest value only impact the office or operations portions of an electrical contracting business (estimating, accounting, purchasing, and project management). For example, takeoff assistance has no impact on labor installation needs. Although it may reduce the time you spend preparing a bill of material or the material price in a bid by a few percentage points, these savings are a fraction of what could be saved with services that help increase the time you spend installing the materials.
For example, the 5% savings in estimation cost from a distributor's custom quoting service translates to $30,000 in additional profit annually (click here to see Fig. 2) for a $5 million contractor. However, the savings from providing services that directly impact the field, such as material staging and delivery coordination, could result in seven times that amount, or $210,000.
More specifically, respondents representing job classifications in the field, office, and warehouse/delivery areas revealed those services that would be most beneficial to them. When asked to identify the portion of their time spent on various material-handling activities, respondents indicated that 50% spent 4% to 6% of their time on the job site organizing material, and 42% spent 2% to 3% of their time on physically moving material from storage to the job-site location and an additional 2% to 3% of their time waiting for materials to show up. These three items alone now account for 8% to 12% of the laborer's time, or approximately 1 hour of his/her 8- to 10-hour shift. The average worker's portion of time spent on each activity is shown in (click here to see Fig. 3). An accumulation of the activities indicates that contractors recognize they spend almost 40% of their time on material-handling activities.
In the same survey, respondents were asked for the areas where distributors could have the largest impact on labor cost. Respondents indicated that of all the services distributors' provide, services at the job site have the biggest impact on field productivity (click here to see Fig. 4). Given this discovery, it's easy to see why channel challenges crop up between distributors and contractors in the course of doing business. The question is, how do you maximize the relationship?
Making the marriage work
To understand what many perceive as a misalignment between the distributor's perception and the contractor's reality, you have to factor in the different influences on each party's respective operations. Contractors operate with the majority of costs being variable, whereas distributors are fixed-cost operators. In fact, 85% to 90% of the operational costs of any specialty contractor, including electrical contractors, are typically allocated as variable costs, regardless of whether the contractor is union or an open-shop. This contrast becomes further exaggerated with external influences at play, such as the recent market shift over the past few years from industrial to commercial/residential work.
A company's financial model is determined by its cost structure (i.e., the combination of its fixed and variable costs, profit and revenue bases, and cost drivers). The company breaks even (starts making profit) once all the costs (both fixed and variable) are covered by the revenue. (click here to see Fig. 5) shows how the model works in the contracting world.
Variable costs are those associated with completing a project: labor, materials, rental expenses, etc. Variable costs increase as sales increase because of the costs required to complete a project. For example, an eight-story building with 200 fixtures on each floor requires twice as many fixtures as a four-story building with the same plans. The cost of the fixtures is a variable cost, as is the cost of installing each one.
Fixed costs, on the other hand, remain fixed no matter how much construction is put in place, such as salaries, inventory, taxes, and interest on loans. These overhead costs are not related to the jobs; therefore, they do not increase when there are twice as many fixtures to install. Likewise, the contractor cannot automatically reduce his fixed costs when the backlog starts shrinking. For example, if a contractor isn't getting new work, he can't just sell his buildings and stop paying taxes, but he doesn't have to buy material or pay the labor to install it.
Because of this financial structure, the contractor can break even and start making profit sooner by improving productivity (reducing the costs incurred related to installation). If you can find a distributor that understands this objective, you've found a great ally to help you make more money. This is why the distributor's impact is so much greater in the field (see Fig. 2) than in the office.
On the other hand, the distributor operates with the financial model shown in (click here to see Fig. 6). The distributor cannot reduce his inventory, eliminate his workforce, or sell the warehouse if he is not covering his cost. In order for the distributor to break even sooner, he has to increase throughput (selling and shipping more product using the same amount of resources). Here is where you can help your distributors. Plan ahead to maximize the use of their resources (building, people, and material inventory).
The misalignment in the perception of value in services from the distributor stems from the differences in these two financial models. Without understanding the impact of variable costs on your profitability, the distributor focuses on services that help in estimating, purchasing, or material ordering. This is not where you need help. It's your job to show your distributors that, by focusing on labor-savings activities, future jobs can turn into a win-win for everyone.
Sidebar: Material Handling Matters
In-house research conducted by MCA shows that 40% of a laborer's time in the contracting profession goes to material handling. That means more than 3 hours of every 8-hour shift by each technician is spent handling the material instead of installing it. In addition, the No. 1 cause of delay on a job site is waiting for material … before it can even be handled!
Labor is the contractor's primary cost driver and the biggest variable on a job. All it takes to double the labor on a task is for the installer is to ask a coworker for help. Then, you have two technicians doing the work of one. In a typical breakdown of a shift, only 40% to 50% of a worker's time is spent on effective installation tasks.
Locating, unpacking, checking, transporting, organizing, labeling, ordering, receiving, and returning are all part of your employees' daily activities. Although these are all necessary steps that must be completed for the project to get done, they are not really what workers are getting paid to do. Because material handling is a hidden cost, it's important for contractors to recognize its impact on productivity in the field and adjust accordingly.